Gov. Jerry Brown held a press conference this morning to announce the details of his proposed FY 2015-16 budget.

California’s economic picture remains brighter than 2010 when the state had a $26.6 billion deficit. During the 40-minute presentation and discussion with the press, the Governor maintained his call for fiscal restraint and cautioned that while the budget is balanced, “it’s not a time for exuberant overkill in our budget spending.”

In brief, the Governor’s FY 2015-16 budget totals $164.7 billion, of which $113.3 billion is in General Fund spending, with $2.8 billion reserved for the ”rainy day” reserve fund in accordance with recently approved Proposition 2. The budget continues many of the policies enacted with the FY 2014-15 budget including allocations of Cap-and-Trade auction funds.

Fiscal restraint is an overriding theme. The Governor stressed that although California’s finances are healthy, the next recession is inevitable, and he reminded the audience there have been 10 recessions since World War II. “This carefully balanced budget builds for the future by saving money, paying down debt and investing in our state’s core needs,” said Governor Brown. “Our long-term fiscal health depends on the wise and prudent actions we take today.”

The Governor’s summary highlights that spending cuts enacted in previous budgets along with the temporary tax increases through Prop. 30 are responsible for the balanced budget he put forward today. The temporary taxes will begin to decline following the upcoming budget year with the entire policy set to expire in 2018. In response to a question from the press, Gov. Brown said he does not support an extension of these temporary taxes.

Another concern highlighted by the Governor was growing retiree health care costs. These include both state employee retirees as well as University of California retirees with a liability totaling $72 billion that is projected to grow to over $90 billion in five years. The Governor wants these costs shared by both employers and employees. California has an estimated $227 billion in long-term costs, debts and liabilities.

The Governor also highlighted that his budget will allocate $532.5 million from the Prop. 1 Water Bond as part of the state’s five year Water Action Plan.

Few specifics were offered on the Governor’s transportation funding plans. When asked about what he might propose, the Governor simply stated that he has a team working on infrastructure and that he will be engaging with various stakeholders as they work to identify funding. “It’s difficult because we are spending a lot of money … it’s always hard to find more. I’m not going to preempt the discussions by predetermining the outcome. We do have a need and we have to take care of it.”

Mandate Repayments

Pre-2004 mandates: The Governor’s budget revealed that as a result of trigger language included with the passage of the FY 2014-15 budget, local agencies are projected to receive an additional payment of $533 million in mandate repayments owed to local governments from prior to 2004. This allocation builds upon the $100 million repayment received by cities, counties and special districts as part of the FY 2014-15 budget. Department of Finance Director Michael Cohen indicated that this number may increase, but that the state needs to wait until the April tax receipts. At this time, there is no additional amount of mandate repayment for this item proposed for FY 2015-16.

Some History: These debts are required to be repaid due to the passage Prop. 1A, sponsored by the League and other local agency groups, which voters passed in 2004 by almost 84 percent. Prior to then, the Legislature had a tendency to impose mandates and then “defer” payment for years, building up debts to local agencies of approximately $1 billion. Prop 1A put a stop to that practice and required state to suspend any state-mandated programs the state is unable to fully fund. As part of Prop. 1A, the state agreed to repay this debt within 15 years. During Gov. Arnold Schwarzenegger’s Administration, several payments were also made on this debt, but this would by the largest. The March 2014 issue of Western City contains an article outlining mandate issues.

Public Records Act Mandates (Pre-Prop. 42): A one-time payment of $9.3 million is proposed to pay back local agencies for costs accrued between 2001 and 2013 for activities under the Public Records Act.

Redevelopment Dissolution

The Governor’s budget outlines a proposal to “simplify” the dissolution process and add “finality”…”to reduce the burden on all parties involved.” While specific details remain scarce, from a local government standpoint, the proposals outlined appear to fit into two categories:

Possibly Workable (depending on details):

Transitioning to an annual ROPS process commencing in July 2016.

Authorizing a “Last and Final” ROPS option, beginning in September 2015, where and agency that has a Finding of Completion and has reached agreement with DOF on enforceable obligations and met unspecified other obligation could put repayment on autopilot with payments made by the county auditor-controller and not have to submit further ROPS or deal with oversight boards and DOF.

Clarifying that tax increment caps and RDA plan expirations do not apply for purposes of repaying all enforceable obligations.

Specifying that all statutory pass-through payments end upon termination of all successor agency enforceable obligations.

An objective to “minimize the potential erosion of property tax residuals.” Such language appears to suggest an effort to change laws which affect pending cases where local agencies may have the chance of prevailing, thus reducing some state financial benefit.

Prohibit reentered agreements that are not for the purpose of providing administrative support activities. The objective here seems to be to undo several cases in which local agencies have prevailed at the trial court.

Declaring that DOF is exempt from the regulatory process. This proposal also affects pending litigation in which local have questioned DOF decisions as not complying with the Administrative Procedures Act.

Reversing the existing law holding that litigation expenses are enforceable obligations, and requiring that such costs come from the administrative costs of the successor agency. This change would undercut the ability of local agencies to protect their legal rights.

Additional language states that the Administration is “committed to working with stakeholders to achieve common ground where possible.” The League has arranged for DOF to make a presentation of these proposals in greater detail in a webinar for city officials hosted Monday, Jan. 12 at 2 p.m.

Transportation

The Governor continues his emphasis on infrastructure investment in his proposed FY 2015-16 budget. Unfortunately the emphasis in the write up seems to be on the needs of the state highways system rather than the transportation system as a whole. The budget summary alleges that 70 percent of available transportation funding goes to local streets and roads, transit, capacity expansions, and debt service. The summary also discusses that additions to the state highways system, funded by local transportation initiatives, also increase the pressure associated with unfunded state maintenance costs.

On a positive note, the proposal addresses the needs to explore new and expanded financing strategies for all parts of the system, including new local-option revenues. Specifically, the Governor discusses the Road Usage Charge Pilot Program and the idea that high-occupancy vehicle lanes should be converted to high-occupancy toll lanes.

Beyond those two proposals, the Governor avoids specifying solutions but stresses the need for additional strategies. These additional strategies will likely be discussed though the Governor’s California Transportation Infrastructure Priorities Working Group established as a result of the FY 2013-14 budget, as well as in the Legislature.

In conjunction with the release of the proposed FY 2015-16 budget, the Governor also released the state’s 2015 Five-Year Infrastructure Plan. Cities should note that the Infrastructure Plan focuses solely on the needs of State-owned and operated facilities, and does not include the needs of local facilities.

In addition, the budget proposal includes:

A proposal to streamline highway relinquishments from the state to local agencies.

$3.4 million and 25 positions for the completion of Project Initiation Documents to support an addition $800 million in various state and local transportation work.

Cap and Trade Allocations:

The budget proposes to allocate $1 billion from Cap-and-Trade revenues, continuing with the structure established in the FY 2014-15 budget:

$200 million for transportation, the Affordable Housing and Sustainable Communities Grant program;

$200 million for low-carbon transportation programs;

$150 million transit;

$250 million for High-Speed Rail; and

$202 million for energy efficiency and clean energy, natural resources, and waste diversion as detailed below:

$75 million for energy efficiency upgrades/weatherization and renewable energy projects in low‑income dwellings within disadvantaged communities;

$20 million for the Energy Commission for energy efficiency upgrades and weatherization in public buildings;

$15 million for the Department of Food and Agricultural for agricultural energy and operational efficiency;

$25 million for the Department of Fish and Wildlife for wetlands and watershed restoration;

$42 million for fire prevention and urban forestry projects; and

$25 million for the Department of Resources, Recycling, and Recovery for waste diversion.

Environmental Quality

2014 Water Bond (Prop. 1)
The budget proposal allocates $532.5 million to begin the first year of a multiyear Proposition 1 expenditure plan. The $532.5 million is allocated as follows:

$66.3 million for the State Water Resources Control Board for wastewater treatment projects;

$69.2 million for the State Water Resources Control Board for safe drinking water in small disadvantaged communities;

$83.5 million for State Conservancies for watershed projects;

$38.9 million for the Wildlife Conservation Board for enhanced stream flow projects;

$19.1 million for the Santa Monica and San Gabriel Conservancies for urban rivers and creeks;

$36.5 million for the Department of Fish and Wildlife for watershed restoration projects (non-Delta and in-Delta);

$32.8 million for the Department of Water Resources for the integrated regional water management program;

$23.2 million for the Department of Water Resources for water conservation;

$600,000 for the State Water Resources Control Board for stormwater management;

$3.3 million for the Department of Water Resources for statewide water system operational improvements;

$5.5 million for the Department of Water Resources for water recycling and desalination;

$131.7 million for the State Water Resources Control Board for water recycling and treatment technology projects;

$21.3 million the Department of Water Resources for groundwater management planning; and

$600,000 for the State Water Resources Control Board for groundwater contamination.

Flood Protection
The budget proposes to allocate $1.1 billion for the Department of Water Resources to support flood protection activities. This allocation appropriates all remaining Prop. 1E, of 2006, funds. These funds support flood protection efforts in the Central Valley, the Sacramento/San Joaquin Delta, and other flood prone areas of the state.

Groundwater Management
In addition to the $21.3 million of Prop. 1 funds for grants for local groundwater plans, the budget proposal allocates $6 million for the Department of Water Resources to provide technical assistance to local agencies on the development of the groundwater sustainability plans, as well as to implement specific requirements of the groundwater legislation such as the adoption of basin boundaries and regulations on best groundwater management practices.

Other Water Action Plan Programs
The budget proposal allocates $6.7 million General Fund and $2.6 million other funds for the Delta Stewardship Council to implement the Delta Science Plan, incorporate the Bay Delta Conservation Plan into the Delta Plan, and coordinate federal approval of the Delta Plan.

The budget proposal allocates $1.4 million for the Department of Water Resources to identify water management operation improvements during drought conditions and streamline water transfers.

Emergency Drought Response
The budget proposal allocates $115 million on a one-time basis to continue critical drought response efforts if the drought continues next year.

The $115 million is allocated as follows:

$61.8 million for the Department of Forestry and Fire Protection for wildlife suppression;

$14.6 million for the Department of Fish and Wildlife for responding to problems of human/wildlife conflict, among other activities;

$11.6 million for the Department of Water Resources to continue to assess current surface and groundwater conditions, expedite water transfers, provide technical guidance to local water agencies, and provide additional public outreach through the Save Our Water campaign.

$7 million for the Department of Social Services to provide food assistance for communities most impacted by the drought.

$22.6 million for the State Water Resources Control Board to continue enforcement of drought‑related water rights and water curtailment actions and provide grants for emergency drinking water projects; and

$4.4 million for the Office of Emergency Services for the State Operations Center to continue to provide local communities with technical guidance and disaster recovery support related to the drought.

State Parks
The budget proposal allocates $41.8 million to State Parks for a number of programs. Those of note include:

$16.8 million one-time increase for existing service levels throughout the state park system;

$1.2 million to open the Los Angeles State Historic Park;

$3 million a year for the next two years for a team of experts from both outside and inside the department to help improve the function of the department; and

$20 million for deferred maintenance.

Department of Toxic Substances Control
The budget proposal allocates an additional $2.44 million to the Department of Toxic Substances Control for the following:

$1.6 million to improve the effectiveness and timeliness of the permitting process and reduce the backlog of permit applications; and,

$840,000 to support pilot projects that address hazardous wastes generated in significant quantities, posing the most significant public risks, and that disproportionately affect disadvantaged communities.

Prop. 39
Prop. 39, which voters approved in 2012, increased state corporate tax revenues. For FY 2013-14 through FY 2017-18, half of the increased revenues, up to $550 million per year, are required to be allocated to energy efficiency projects in public schools, universities and colleges, and other public buildings. The Governor proposes to allocate all $368 million of available Prop. 39 revenue for energy efficiency projects to K-12 and community colleges.

The $368 million is allocated as follows:

$320.1 million and $39.6 million to K‑12 school and community college districts, for energy efficiency project grants;

$5.3 million to the California Conservation Corps for continued technical assistance to K‑12 school districts; and

$3 million to the Workforce Investment Board for continued implementation of the job‑training program.

Public Safety

Continuation of $40 million allocation for Front-Line Public Safety

Administered via Board of State and Community Corrections to individual cities acting as the fiduciary agent within each county.

Ultimately distributed to individual Police Departments.

Rail Shipments of Oil
$10 million for Regional Railroad Accident Preparedness and Immediate Response Fund: This will allow the State Office of Emergency Services (OES) to coordinate with local agencies to enhance overall preparation for and responses to emergencies involving hazardous materials transported by railroad tank cars. Funded by a fee on transport of hazardous materials by rail. OES will use the funding to purchase specialized equipment such as foam trucks, and for training exercises.

Realignment-related expenditures

Recidivism Reduction Fund:

Re-appropriation of $12.6 million for Community Re-entry Facility contracts: facilities to provide mental health and substance abuse disorder treatment

$15.6 million for expansion of substance abuse disorder treatment at non-reentry hub institutions.

Community Corrections Performance Incentive Grant:

$125 million to county probation departments in response to reductions in the number of adult probationers returned to prison (SB 678 funding)

Post Community Release Supervision (PRCS) funding:

$16 million increase to county probation departments to supervise temporary increase in average daily population of offenders under PRCS due to prison population reduction measures.

Proposition 47

No allocations for Corrections or local law enforcement, but references 132 inmates having been re-sentenced and released from prison as of Dec. 4, 2014.

Budget estimates that average daily prison population in FY 2015-16 will be reduced by 1,900 inmates due to combination of re-sentencing and avoidance of new admissions due to Prop. 47

See Judicial Branch summary below for additional information

Debt Amnesty Program and Peace Officers’ Training Fund

The Peace Officers’ Training Fund, along with the Corrections Training Fund, both receive significant revenue from the State Penalty Fund, and both are projected to become insolvent during FY 2015-16, due to declining revenues going into the State Penalty Fund, dating back to 2009.

To address the projected insolvency, the Budget establishes an 18-month amnesty program for outstanding delinquent debt:

The program authorizes individuals with delinquent court-ordered debt due before Jan. 1, 2013, and resulting from traffic infractions and certain misdemeanors to pay it off at a 50 percent reduction if they meet the eligibility criteria.

The reduction would include interest and late penalties.

This is expected to result in a $12 million increase in penalty assessment revenues.

Amounts distributed to the State Penalty Fund via the Amnesty Program would go directly to the Peace Officers’ Training Fund and Corrections Training Fund, to cure the immediate insolvency in both.

To be administered by courts and counties

Long term solution to structural deficit in the Peace Officers’ Training Fund to begin with $5.3 million reduction in funding for its state administrative costs

Delinquent Debt Amnesty Program (see Public Safety section above); and

Proposition 47: Allocation of $26.9 million for anticipated trial court workload increase due to re-sentencing petitions related to drug and theft crimes.

In addition, $42.7 million is proposed for trial court employee benefit costs. Of that amount, $10.8 million is for trial courts that have made progress towards meeting PEPRA standards.

State Retiree Health and Pension Costs

The Governor is looking to address the $72 billion unfunded liability in state retiree health. His proposal includes revamping the “pay-as-you-go” system and turns to a prefunded model, similar to that of pensions. He wants employees to share equally in prefunding retiree health benefits and will look to phase this in as labor contracts are renegotiated.

CalPERS Retiree Obligations: $5 billion is proposed for state contributions to CalPERS for state pension costs and reflects the 2014 demographic presumptions.

CalSTRS Retiree Obligations: The budget proposal includes $1.4 billion to implement into the second year of the teacher pension funding plan. This is part of the 2014 funding plan to close the expected shortfall over the next 30 years.

Department of Industrial Relations

There is a $22 million increase for the Department of Industrial Relations over the 2014 budget. Significant increases were made for Occupational Safety and Health Inspections in order to have 44 new positions. Costs for routine elevator inspections are proposed for a “fee holiday” due to a surplus in associated funds.

Community Care Licensing

Following up on last year’s efforts to create new positions to enhance the quality of the Community Care Licensing Program, the budget includes $3 million from the General Fund and 28.5 staff positions to address a backlog of complaint cases and expand training and technical assistance. As of January 2017, the Department of Social Services will increase inspection frequency to every three years for all facilities, every two years by 2018 for all facilities except child care and annually by 2019 for adult day care and residential care facilities for the elderly.

Community Services

Child Care
The budget proposal makes the following adjustments to subsidized child care programs as follows:

$33.5 million increase to reflect a full-year update to the regional market rate;

$11.6 million decrease to reflect a reduction in the number of CalWORKS Stage 2 cases and an increase in the cost per case;

$38.6 million increase to reflect an increased number of CalWORKS Stage 3 cases and an increase in the cost per case; and

$14.9 net decrease of federal child care and development funds.

Mental Health and Substance Use Disorder Services
The budget proposal allocates $2.2 million for recertification efforts and implements on‑site monitoring of provider operations to further fraud prevention efforts at mental health and substance abuse treatment facilities.

Workforce Development

The proposal provides $500 million in Prop. 98 funds for the Adult Education Block Grant as part of the state’s workforce development strategy. The block grant will fund elementary and secondary basic skills, classes and courses in citizenship and English as a second language for immigrants and short-term career technical education. It proposes $250 million in one-time funding for each of the next three years to support a transitional career technical education Incentive Grant Program.

Governor’s Economic Development Initiative/Enterprise Zones

Revenue growth from sales tax from FY 2013-14 to FY 2014-2015 is muted by the $86 million reduction in revenues as a result of the start of the manufacturing equipment sales tax exemption on July 1, 2014. This exemption was one of the pieces of a tax package adopted in 2013 that replaces enterprise zones with the Governor’s Economic Development Initiative. The sales tax exemption applies to purchases of manufacturing or biotech research and development equipment, valued up to $200 million per business. Receipts from the sales tax, the state’s second largest revenue source, are expected to contribute 22.2 percent of all General Fund revenues and transfers in FY 2015-2016.

While not mentioned in the Governor’s Budget Summary, a joint call with the Governor’s Office of Business and Economic Development (GO-Biz) and Labor and Workforce Development noted that GO-Biz is accepting applications for the California Competes Tax Credit from now until Feb. 2, 2015 with $75 million in funding available. The California Competes Tax Credit is an income tax credit available to businesses that want to come to California or stay and grow in California and is part of the Governor’s program to replace Enterprise Zones.

Next Steps

The Department of Finance will begin releasing draft trailer bill language in the next month that will include details of the proposal. The Assembly and Senate Budget Committees will also begin hearings to review program-specific details. In May the Governor will release his revised budget proposal for the coming fiscal year that must be passed by June 15 to take effect July 1.